1 CHAPTER 4 Functions of the Fed

2 CHAPTER 4 OVERVIEW This chapter will: A.Identify the key components of the Fed B.Describe how the Fed influences monetary policy C.Explain how monetary policy is used in other countries

3 A. Organization of the Fed 1. Federal Reserve District Banks a. 12 national districts b. New York is considered most important c. Member banks must purchase stock d.Each district has 9 directors e.District banks: 1.) clear checks 2.) replace old currency 3.) provide loans to member banks

4 A. Organization of the Fed 2. Member Banks a. Required of all nationally chartered banks b. At present, about 35% of all banks are member banks c.Member banks hold about 70% of all bank deposits in the U.S. economyy

5 A. Organization of the Fed 3. Board of Governors a. Composed of 7 members appointed by the President for a 14 year non-renewable term b.Chair selected by President to serve a renewable 4 year term c. Roles of the Board: 1.) regulate commercial banks 2.) control monetary policy

6 A. Organization of the Fed 4. Federal Open Market Committee (FOMC) a. Made up of 7 members from the Board of Governors plus the presidents of 5 district banks. Chair is Chair of the Board b.Main goals: 1.) achieve stable economic growth 2.) stabilize inflation

7 A. Organization of the Fed 5. Advisory Committees 6. Integration of Federal Reserve Components

8 B. Monetary Policy Tools 1. Open Market Operations a. FOMC Meets b. Communication to the Trading Desk c. Role of the Trading Desk d. Fed purchase of Securities: increase in money supply e. Fed sale of Securities: decrease in money supply

9 B. Monetary Policy Tools 2. Adjusting the Discount Rate a. influences the market interest rates 3. Adjusting the Reserve Requirement Ratio Reserve Requirement Adjustments affect Money Growth because higher reserves lead to less borrowing and lower reserves lead to more borrowing

10 B. Monetary Policy Tools 4. Fed Control of the Money Supply. Which form of money to control? M1 = currency help by the public in checking accounts M2 = M1 + saving accounts + money market deposit accounts (MMDA) M3= M2 + Large time deposits

11 C. Global Monetary Policy Each country has its own central bank that controls the money supply and monetary policy 1. A Single Eurozone Monetary Policy a. Impact of the Euro on Monetary Policy 1.) 12 European countries made their currency the euro 2.) European Central Bank based in Frankfurt 3.) Monetary policy set for the 12 members b. Variations in the Value of the Euro fluctuated widely since introduced in1999